The current rage in the world of investing is the special
dividend. It's a one-time event that is designed to reward
shareholders with a larger than normal payout. The reason for this
is simple, the tax rate is going to change in 2013, so companies
are loading up on dividends now instead of the slow trickle that
investors are used to.
The strategy around the special dividend has as much to do with
returning cash to shareholders as it does with keeping the stock
off a sellers hit list. With changes to the capital gains tax rate
coming next year, December is likely to see a barrage of selling in
stocks that have had significant year to date increases. The
thinking there is that investors will take the gain and pay a lower
tax rate in 2012 than they would in 2013. The special dividend is a
tool that some companies may use to deter that line of thinking, or
even put the EX-D date as close to the end of the year as possible.
Not A New Idea
The special dividend has been around for a long time... The most
famous and probably the biggest was the 2004 $3 payout by
Microsoft. They had $69 billion in cash on hand for a $32 billion
special dividend of $3 per share. They also enacted a buyback to
bring the total return of capital to shareholders to $75 billion.
Eight years later, the company has $66 billion in cash again.
I pulled a chart to gauge the interest of special dividends, and
the peak was reached in November 2004, when the Microsoft dividend
was about to trade Ex-D. The indexed chart has November 2012 at a
26 - well below the November 2004 peak.
Notable Special Dividends
Companies of all sizes have utilized the special dividend. Town
Sports International (CLUB) recently went EX-D on a $3 per share
special dividend, paying out $71.4 million. The company noted that
it would borrow $60 million to fund the payout. CLUB has a market
capitalization of $232 million, so it is a small cap. From the date
of the announcement to the before the stock traded without the
dividend, the stock rose 5.3%.
A mid cap name that is also doing a special dividend is Dillard's
(DDS). The company declared a one-time cash dividend of $5 per
share. The company will pay the dividend to shareholders of record
as of December 7, so the ex-D date will be December 4. You will
need to but the stock before the close of trading on December 3 to
get the dividend. The payout will be approximately $235 million.
The company last reported cash on hand of $124 million, so a debt
offering of $150 million or more is likely in the works.
At $44 billion in market capitalization, Costco (COST) is a big
cap. It too joined the dividend parade with a $7 special dividend
that will cost $3 billion. The $7 will be paid on the 18th of
December to shareholders of record at December 10. This means the
stock will trade EX-D on the 7th, and will open $7 lower than the
close on Thursday, December 6th. As a result of the borrowing that
is to occur to raise the $3 billion, Fitch downgraded its issuer
rating to 'A+' from 'AA-'.
Those are three examples of companies that are the three major
sizes of stocks. I know that I used two retails names in there, but
I liked the idea of $3, $5, $7 - which used to be my favorite
boutique in the mall.
I ran a screen on the Zacks Research Wizard for stocks that had a
Zacks Rank of #1 (Strong Buy) or #2 (Buy) and looked for high
insider ownership. This provided a lot of results, but more
research was required. For instance, #1 Ranked World Wrestling
Entertainment (WWE) sounded like a sure winner as the chairman
Vince McMahon holds a significant amount of stock, but a quick
breeze through a recent 10K showed that the McMahon family has an
agreement that gives them a smaller dividend, so a special dividend
could be subject to the same stipulations.
That screen provided these candidates:
Syntel
(
SYNT
) - with a #1 Ranking, the company has 36% insider ownership of
36%, institutional ownership of 34% and $10 of cash per share. The
company already pays a small dividend of $0.24 or 0.4% so a $2 to
$4 special dividend from this low bed, cash rich business is a real
possibility.
DSW Inc
(
DSW
) is benefitting from the hot trend in the footwear category, and
they came in with 51% insider ownership. With $7.57 in cash per
share, the company could easily afford to increase its $0.72
dividend to something much more significant. DSW is a Zacks Rank #2
(Buy).
When I loosened the requirements to a #3 (Hold) Rank
Caesars Entertainment
(
CZR
) showed up. Several of its competitors have also done special
dividends and CZR has almost $9.50 in cash per share.
Interacting Plays?
Two other names that I wanted to throw out there Interactive
Brokers (IBKR) and IAC/InterActiveCorp (IACI). Both are majority
controlled by one person, Thomas Peterffy for the brokerage company
and Barry Diller for the internet company. Peterffy is just coming
off a failed election campaign to get watchers of financial focused
TV to vote republican, so adding some cash back in his pocket to
pay for those ads makes sense. Diller, on the other hand, may be
more interested in find another M&A transaction that going the
dividend route, but ultimately it is his decision.
Good Shooting ?
Strum Ruger (RGR) was one of the early names to announce the
special dividend. Its primary competitor
Smith & Wesson
(
SWHC
) reports earnings on December 6, and it could be the time to
announce the special dividend. Since the RGR announcement of a
special dividend of $4.50, the stock is up nearly 20%. SWHC has
$0.87 of cash per share.
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Brian Bolan is a Stock Strategist for Zacks.com. He is the
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